Senior EU officials see opening after Omicron for centralising revenue streams

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The triple concern of the Omicron variant, the energy crisis and the cost of the transition to net zero carbon emissions has reportedly prompted a radical re-look at the EU’s fiscal rules. It is not the first time the economic union has considered centralising the ability to tax and redistribute funds as it sees appropriate at a single market level.

The move would mark a sizeable power grab by bureaucrats and, depending on what policies are put forward, could see the EU take the power to shape certain fiscal policy of member states.

Mujtaba Rahman, a former Treasury and European Commission economist, tweeted this morning: “Forget incremental reform to EU’s fiscal rules.

“Senior officials in Brussels see an opening with EU capitals – after Omicron, energy price crisis and social costs of net-zero transition – to re-up discussions on a centralised fiscal capacity for EU.”

He added this was “much more interesting”.

Julius Waller, partner at EPPA, a management consultancy which assists “alignment between business, European Union institutions and governments”, replied: “What does this even mean?

“You are implying some kind of major centralised scheme playing into the British trope of the ever closer union.”

In October, a paper on potential fiscal reforms by members of the European Stability Mechanism said the “new economic reality” the coronavirus pandemic had created “necessitates a fresh look at the European fiscal rules.”

It explained: “The pandemic crisis radically changed the economic landscape, triggering temporary suspension of the fiscal rules.

“The crisis brought higher debt-financed spending, with its aftermath potentially further burdening public budgets.

“The monetary policy response to the crisis kept interest rates low and debt-servicing burdens manageable, making higher deficit and debt levels tolerable for the markets.”

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In a 2018 article, Marco Buti, head of the cabinet of then-European Commissioner Paolo Gentiloni, and Nicolas Carnot, an economic adviser at the European Commission, claimed “the incomplete nature of the financial union and the absence of common fiscal instruments” were responsible for “a lack of adjustment channels to large shocks”.

Mr Buti added: “Key ingredients to overcome these gaps are the completion of banking union and capital markets union (CMU) as well as the introduction of a stabilisation function.”

They pointed to member states who have high levels of debt as being in “an especially fragile position” if there is an economic downturn.

In such a situation, “these countries may be facing an unpalatable choice between tightening policy at the wrong time to reassure markets and risking a self-fulfilling spiral of higher deficits and interest costs,” Mr Buti said.

“In those circumstances, an element of fiscal risk sharing can tip both policies and expectations towards a better equilibrium and prevent the materialisation of self-destructing austerity or a full-blown meltdown.

“This is not mutualisation but insurance for the benefit of the whole Union.”

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